Real estate tax not as bad as perceived

AS Realtors, we are at the front line of one of largest transactions that American families will face in their lifetime.

The industry term used to describe us is "rainmaker". This term is used because we typically have first access to the consumer who is responsible for many economic transactions in a relatively short period of time.

From homeowners insurance, inspections and termite repairs, Realtors are the mouthpiece that other vendors use to speak to the client. So as is often the case, when one of these transactions goes awry it's the Realtor who takes the brunt of the blame. Therefore, it is our responsibility to be up to date on the current buzz we read in the newspapers, online and on TV.

This brings me to my point about President Obama's Plan for a Healthy America and how it affects real estate sales.

A provision of the health care legislation creates a 3.8 percent Medicare tax on real estate transactions. My next-door neighbor Keith brought this to my attention. I was immediately taken aback because I had not heard about it in the real estate community and there was not a lot of talk about it at meetings and seminars, which are held almost weekly for Realtors

My thoughts were that no one was talking about it because no one understood it. Since I have been getting ever-increasing questions about it, I feel it is my responsibility to extract fact from fiction.

Fiction: Health care legislation imposes a 3.8 percent tax on all home sales.

Fact: Health care legislation imposes a 3.8 percent transaction tax, but only on profits over the capital gains threshold.

With this provision in the health care bill, less than 5 percent of all taxpayers will be affected.

This provision has been misreported all over town that a 3.8 percent sales tax will be in effect for all real estate transactions. We can all exhale a big sigh of relief now. You might ask yourself, what is "over the capital gains threshold," and what does it mean to me?

The Patient Protection Affordable Care Act, or PPACA, creates a new Code Section 1411, which takes effect in 2013. In its most rudimentary definition, if you sell your home for a profit above the capital gains threshold of $250,000 per individual or $500,000 per couple, then you would pay the 3.8 percent tax on any gain on the sale realized over the threshold.

For the tax to have any impact, the $250,000 income threshold must be exceeded (that leaves out 95 percent of Americans). Then the tax would apply only to the taxable net profit from the sale of a home.

Here is where we can exhale. Let's say you bought a home for $300,000 20 years ago and over the years you made improvements equal to $100,000 (new kitchen, new roof, etc.). Now your cost basis is $400,000. Currently, there is a $500,000 exclusion (married couple) for the taxability of profit on the sale of a home. So, in this example, you could sell the home for up to $900,000 and have no taxable profit, thus the 3.8 percent tax would not apply. Most people who sell their homes will not be impacted by these new regulations.

In my attempts to decipher the truth from fiction I hope that I have cleared up any confusion.

Please consult a tax attorney or your accountant for additional information or simple e-mail me